Retirement: Your road map to retirement, ages 21-35

September 04, 2012|By Jane Bennett Clark | Kiplinger's Money Power

Your most valuable asset when you're young isn't just a full head of hair. It's time. If you start socking away $200 a month in a retirement account from the moment you land your first full-time job at age 22, your nest egg will be worth $1.2 million by the time you reach age 67, assuming your investments grow 8 percent a year.

Stuart Ritter, a certified financial planner for T. Rowe Price, recommends investing 15 percent of your salary toward retirement. That may seem like an unreachable goal for young people. But with tax breaks associated with employer-sponsored retirement plans, you can reduce your actual out-of-pocket contribution.

-- Enroll in the 401(k). Most major companies that offer 401(k) plans match a percentage of your contributions. Typically, these matches range from 25 percent to 100 percent of your contribution, up to 6 percent of your salary. In addition, the money that you contribute to your 401(k) is excluded from taxable income.

-- Fund an IRA if you don't have a 401(k). For most young workers, the best choice is a Roth IRA. Contributions aren't tax-deductible, but you can withdraw them anytime tax-free. And as long as you wait until you're 59 1/2 to take withdrawals, earnings are tax-free, too. You can invest up to $5,000 in a Roth in 2012. That doesn't mean you need $5,000 -- or even $1,000 -- to get started. Some mutual funds and brokers, including Charles Schwab, will waive minimum investment requirements if you sign up for an automatic investment program.

-- Pay off student loans -- in good time. Don't pay off federal student loans more quickly than necessary, Ritter says. The interest rate is fixed and relatively low compared with the rates many borrowers get on private student loans, and up to $2,500 of the interest is tax-deductible.

-- Resist cashing out a 401(k). When you change jobs, you have several options for your 401(k) plan. You can leave it with your former employer, roll it into an IRA, roll it into your new employer's plan (if your employer permits such rollovers) or ask your former employer to cut you a check.

You may be tempted to choose the last option, but in most cases, that's a bad idea. Your employer will withhold 20 percent of the amount withdrawn to cover income taxes. And because you're under 55, you'll also have to pay a 10-percent early-withdrawal penalty on the entire amount. Plus, you're jettisoning any growth you've earned, which sends you back to square one when you start saving again.